Tuesday, January 10, 2006

TD Banknorth Inc. said yesterday its first-quarter earnings will be below analyst forecasts and announced plans to restructure its balance sheet ahead of the closing of the purchase of Hudson United Bancorp.

Banknorth, the U.S. banking subsidiary of Toronto-Dominion Bank, said its fourth-quarter diluted earnings will be US62 cents per share, US2 cents lower than analyst estimates. Its earnings are due Jan. 23.

"The primary reason for this is the pressure on net interest margin currently being experienced by TD Banknorth, like many other financial institutions," the lender said in a statement. "TD Banknorth's net interest margin, on a fully taxable-equivalent basis, decreased from 4.09% during the third quarter of 2005 to 3.96% during the fourth quarter of 2005."

At the same time, Banknorth said it plans to sell US$2.6-billion of mortgage-backed securities and reinvest the proceeds in shorter-duration assets as it shores up its balance sheet.

"The asset sales will reduce the earnings volatility inherent in these interest-earning assets as a result of prepayments and call features," Portland, Me.-based Banknorth said.

Banknorth will take an after-tax loss of US$29.3-million connected to the restructuring. Then, once it buys Hudson, the bank said it plans to sell another US$2.7-billion of investments and spend the proceeds to pay down debt.

"The company anticipates that these actions will not have a material impact on earnings per share on a going-forward basis," it said.

In a research note to clients, Genuity Capital Markets analyst Mario Mendonca wrote that "we believe this announcement has minimal impact on [Banknorth's] cash contribution to TD Bank."

However, the note stated Banknorth's move suggests "management is concerned that the flat-to-inverted state of the yield curve in the U.S. may continue for an extended period of time."

Banknorth's US$1.9-billion stock and cash purchase of Hudson, a New Jersey-based bank, is expected to close in the first quarter of this year. Also in connection with the deal, Banknorth yesterday announced it plans to repurchase up to 8.5 million of its shares.